Our favourite holding period is forever (Warren Buffett)
Like many of you I suspect, I tuned in* to to hear the latest pronouncements of the Sage of Omaha last weekend, as Warren Buffett gave his verdict on the situation in which we now find ourselves. Even at the age of 89, Buffett's analysis remains as sharp as ever.
There were three themes that struck me:
- Confidence in the American Economy long-term For regular readers of his letters to investors, this is a common theme. That is why for many investors he advocates considering investing in a simple Index Tracker of the S&P500 as opposed to betting on individual shares. He is a big fan of the ingenuity, creativity, diligence and resilience of the US economy . It is encouraging to see that this latest crises has not shaken his view.
- The importance of cutting losses He admitted mistakes in his recent purchase of airline stocks- and in his case it wasn't just three grand of Easyjet (EZJ) shares. When you take 10% stakes in the biggest airlines in the US, you have some skin in the game. Many who were in this deep would be inclined to hold on and weather the coming storms. It takes courage to admit that you were wrong and withdraw.
- The short-term irrationality of Markets He told the tale of a farmer who owned an identical farm next door to the one that you owned. You were happy with your farm in that it yielded a certain amount annually and you were satisfied with the return that you were receiving on your original investment. The guy next door was however offering you his identical farm on a daily basis for a different price each time. The price he was offering was dependent on his mood (or his drinking or pot-smoking that day). The intrinsic asset he was selling was just as good as yours and underlined another mantra of his Price is what you pay. Value is what you get. The implication was that you should ignore the noise of markets (particularly short term)- always value what you are buying on an intrinsic basis- fundamentally is it worth what you are paying for it?
With those messages in mind, my interest was piqued by a survey that was done within one of the investing groups that I'm part of on social media. A survey was done as to which 5 shares do you expect to do well over the next 5 years if you were to buy them well. The range was not limited to the UK, but included other major markets.
There were over 100 responses to the survey and the top 5 were as follows in order:
- Tesla (TSLA) (Automotive/Technology)
- Amazon (AMZN) (Retail/Technology)
- Microsoft (MSFT) (Software/Technology)
- Disney (DIS) (Entertainment/Technology)
- Royal Dutch Shell B (RDSB) (Energy)
Some immediate conclusions:
- 80% of the stocks were US listed
- Those same 80% had technology as a key component of how to deliver their product to Market
- All bar one are currently on punchy valuations (decreasing inversely to popularity):
- Tesla- Price to Earnings Ration (PE) 128.8 and Price to Book Value (PBV)- 16.6
- Amazon- PE 73.6 and PBV- 18.2
- Microsoft- PE 30.2 and PBV- 12.2
- Disney- PE 22.9 and PBV- 2.18
- Royal Dutch Shell B- PE12.2 and PBV- 0.68
- The top 3 have seen hugely impressive price-rises in the last year and price momentum is high
- The middle 3- Amazon, Disney and Microsoft are already being heralded as some of the "winners of Lockdown"
- Arguably all have distinct competitive advantages in that that they have been very tough competition for others on the way up and have significant competitive moats.
All seem on the face of it to be decent investable propositions.
However there are some concerns that I would need to overcome before I dipped my toes into any of them. Referring back to the points 1 and 3 that I drew from Mr Buffett's talk.
- Confidence in the American Economy- Given that 4/5 have their main market in the US, this is quite relevant. Whilst I share the relative confidence of Buffett, all of these companies will see their revenues decline if we head into a full blow recession. I cannot see lots of people buying Teslas, if they are primarily concerned about putting bread on their tables. If there are lots of corporate failures, Microsoft's revenues (sticky as they are) will be hit. Amazon's model depends on relative low margins over a huge range of products- turnover is key. That will decrease in a recession. Disney sell a discretionary item and spend on that decreases in recessions. In recessions, oil demand is hit (albeit ironically not as hard as it is being hit at the moment) so RDSB's oil sale price will be impacted. Which leads me on to the other point
- The short-term irrationality of Markets The valuations are (with one exception) sky high. In many ways all bar RDSB are priced for perfection. Now of course, if you believe in America and indeed its ability to sell its product in great quantities to a waiting World then there is every possibility that these companies will grow into their expensive valuations (even if it takes 128 years in the case of Tesla...) However if you believe that woe is yet to come, then the Market may just yet throw these companies to you at cheaper prices than they are now. At present, it does seem that the Crowd believe the story and will keep on bidding up the Stock. But will they do so such that you are sitting on a nice profit in 5 years? No-one knows.
For what it's worth, whilst I'm happy to have exposure to these companies through Indices, as individual propositions they are not for me unless they present at bargain prices relative to their worth. That actually did happen briefly in March when Apple (AAPL) dropped to a tempting level but had shot up again before I could bag any. I much prefer the mantra of growth at a reasonable price and this will form the subject of my blogs over the next few weeks.
*This blog is published subject to my normal disclaimer